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Valspar's Earnings Tops, Hits New 52-week High - Analyst Blog

Shares of leading paints and coatings maker
Valspar Corp.
(
VAL
) clocked a new 52-week high yesterday following the release of
its second-quarter fiscal 2013 (ended Apr 26, 2013) results that
showed a rebound in its paint business.

The Minneapolis-based company reported earnings, barring
restructuring charges, of 91 cents per share for the quarter that
beat the Zacks Consensus Estimate by a couple of cents and
exceeded the year-ago quarter's earnings of 84 cents per share.

Profit, as reported, rose modestly year over year to $76.9
million or 84 cents a share as gains in Valspar's Paints segment
was neutralized by a decline in the larger Coatings division.

Valspar's shares rose roughly 5.5% to a new 52-week high of
$71.57 on the earnings beat and encouraging results in the paint
business. The stock closed at $71.46 at the end of the trading
session yesterday. Valspar's shares are up roughly 15% so far
this year.

Sales Miss, but Paint Shines

Sales were essentially flat year over year at $1,031.2 million in
the reported quarter, missing the Zacks Consensus Estimate of
$1,064 million. Despite irregular demand trends across a number
of end-markets, Valspar logged a 7% gain in overall volumes in
the quarter.

Revenues from Valspar's Coatings unit edged down 1% year over
year to $537 million as rise across packaging, wood and coil
coatings was masked by lower demand for general industrial
products.

Sales from the Paints segment, however, rose 3% to $438 million
in the quarter on higher volume and a double-digit sales gain in
North America. A recovery in the housing market aided the
segment's performance. This represents an encouraging sign as the
division struggled with lower sales in the last couple of
quarters, partly due to depressed demand in overseas markets.

Margins and Expenses

Gross margin (as reported) fell to 32.8% in the reported quarter
from 34.4% a year ago. Adjusted gross margin declined to 33.5%
from 34.6% in the prior-year quarter. Operating expenses fell
roughly 7% year over year to $208 million, helped by lower
selling, general and administrative costs. Operating expenses (as
a percentage of sales) were 20.2%, down from 21.8% a year ago.

Sound Balance Sheet

Valspar maintained a healthy balance sheet with cash and cash
equivalents rising 9.5% year over year to $228.3 million at the
end the quarter. Total long-term debt declined 17% year over year
to roughly $1,044.2 million.

Guidance Backed

Valspar, which is among the leading paints companies along with
PPG Industries
(
PPG
) and
The Sherwin-Williams Company
(
SHW
), reaffirmed its earnings forecast of $3.60 to $3.80 per share
for fiscal 2013. The company sees improved results in the second
half based on the domestic housing rebound and new business
initiatives.

Valspar also noted that its restructuring measures are expected
to result in one-time, after-tax charges of $18 to $23 million in
fiscal 2013 and 2014. Its restructuring actions are primarily
aimed at improving manufacturing capabilities in North America
following the buyout of the paint manufacturing assets from Ace
Hardware Corporation in earlier this year. The acquisition is
expected to boost Valspar's retail foothold in the U.S. and offer
incremental revenues from the sale of Ace-branded paints.

Last month, Valspar extended its retail paint program with
Lowe's
(
LOW
) to meet the needs of the professional painters. The program
includes Valspar-branded professional grade products in multiple
formulations and finishes that simplify paint selection and
deliver durable performance as per the needs of professional
painters. Valspar, through this new retail paint program, expects
to reach more than 1,700 Lowe's retail locations.

Our View

Valspar, a Zacks Rank #3 (Hold) stock, has a strong pipeline of
new products and significant opportunities for share gains in
both its Paints and Coatings segments globally. The company
should also benefit from new business wins and restructuring
actions. However, we are cautious about cost pressures associated
with raw material inflation.

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